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Where should I put my 401k savings until I am able to contribute again?

Question: Where should I put my 401k savings until I am able to contribute again?

I recently switched companies and cannot contribute to my new 401k for a year. I want to continue to save and would like to put a percentage of my savings into the 401k once it becomes available to me. Is this possible? What would be the best option for me in order to save for retirement? Should I create a Traditional IRA or Roth IRA?

Answer:

I would recommend starting an IRA. Please note that you can never roll money from an IRA into a 401k plan later on. There wouldn’t be any advantage to that even if it were possible. Only existing 401k balances can be rolled into another 401k. The one disadvantage of creating the IRA is that you do not get a company match like you would with a 401k. There are significant tax savings with a Roth IRA that you should read about.

3 Responses to Where should I put my 401k savings until I am able to contribute again?

If I were you, I would put the money into a Roth IRA. The money will grow tax free there as long as you save it for retirement. It’s really a great program especially for people who have a long investing horizon before retirement.

I would simply leave the money in the Roth and now transfer it to another 401k plan. You have more control over the funds and likely more investment options. In fact, I would only contribute as much to your 401k as it takes to get the maximum company match. I’d put the rest in the Roth IRA going forward.

If you put the money into a Roth IRA, then you must pay tax on it, and you cannot roll over the money to a 401K later.
If you do not want to pay tax on it or you want to be able to roll over the money to a 401K, then you must either leave it in the 401K or put it in a traditional (not Roth) IRA.

Yes, a Roth IRA is likely optimal. However, if you go that route be sure to not lose track of when your company will start those matching contributions. Don’t want to leave free money on the sidelines. Some 401k’s also have Roth options so keep that in mind as well.